Do you want to learn how to remove PMI? You’re in the right place! Keep reading to find out how you can save THOUSANDS on removing your Private Mortgage Insurance. Plus, as an added bonus, get the FREE PMI removal letter template.
What is PMI?
Private Mortgage Insurance (PMI) is a type of insurance that is often required by lenders when a homebuyer puts down less than 20% of the home’s purchase price as a down payment. The purpose of PMI is to protect the lender (not the borrower) in case the borrower defaults on the loan.
If the borrower defaults on the loan, the lender can file a claim with the insurance company. The lender may be able to recover some of their losses. The borrower will still be responsible for any remaining balance on the loan. In other words, a benefit to the lender is paid for by the borrower. The main benefit of PMI is it allows the buyer to put down less money when buying a home.
Why Is PMI Important?
PMI is useful because it allows borrowers to obtain a mortgage loan with a lower down payment, which can make homeownership more accessible to people who may not have saved up a large down payment. The median sales price of a house as of Q4 2022 is 467,700! Which means unless you have $94,000 saved, you’re getting PMI. (Don’t worry, we can talk about how to remove it later). Without PMI, many borrowers would not be able to qualify for a mortgage.
PMI is typically paid by the borrower as part of their monthly mortgage payment, and the cost of PMI can vary depending on the size of the down payment and the borrower’s credit score. Once the borrower has paid down their mortgage to the point where they have 20% equity in the home, they may be able to cancel their PMI.
Factors affecting PMI
The exact amount of PMI varies depending on several factors, including the size of the down payment, the borrower’s credit score, and the loan-to-value (LTV) ratio. It’s important to note that the PMI rate and the amount of PMI can vary depending on the lender’s requirements and the specific details of the loan, so borrowers should consult with their lender for specific information on PMI costs.
Tip: Many home search sites include an estimate of PMI in the mortgage payment calculator on a listing. I have found these to be overinflated in my personal experience. So don’t get discouraged if the payment looks high because of PMI. Talk to a lender to get an accurate estimate before you decide not to put in an offer on a home.
Calculating PMI
The PMI amount is typically calculated based on a percentage of the loan amount. The LTV (loan-to-value) ratio is the ratio of the loan amount to the appraised value of the home, expressed as a percentage. For example, if a borrower puts down 10% on a home that appraises for $200,000 and takes out a loan for $180,000, the LTV ratio would be 90%.
The amount of PMI can vary depending on the lender’s requirements, but a typical range is between 0.3% – 1.5% of the original loan amount per year. For example, if the loan amount is $200,000 and the PMI rate is 1%, the annual PMI cost would be $2,000 (1% x $200,000) or $166.67 per month. This amount would typically be added to the monthly mortgage payment.
How To Remove PMI
If you are a homeowner who is paying these mortgage insurance premiums, you may be wondering how to remove PMI.
It’s important to note that the process for removing PMI can vary depending on your lender and the type of mortgage you have. You should review your mortgage agreement and talk to your lender to understand the specific requirements and options available to you.
Here are a few ways to remove PMI:
Wait for Automatic Termination
In some cases, lenders are required to automatically terminate PMI when the homeowner’s equity reaches a certain level. This is typically when the homeowner has paid down the mortgage to 78% of the home’s original value. If you paid $200,000 for your house, the remaining loan amount would need to be $156,000 before the lender automatically cancels PMI.
Build Up Your Equity
If you continue to make your mortgage payments on time, your equity in the home will gradually increase. Once your equity reaches 20% of the home’s value or purchase price, you can ask your lender to cancel the PMI.
Refinance Your Mortgage
If you’ve built up some equity in your home and have a good credit score, you may be able to refinance your mortgage to a loan that doesn’t require PMI. This can help you save money on your monthly payments. However, make sure to factor in the interest rate and closing costs. You wouldn’t want to significantly raise your interest rate on a 30 year mortgage.
Make Extra Payments to Remove PMI
If you have the funds, you can make a lump-sum payment toward your mortgage principal. Extra payments will help you reach the 20% equity threshold faster. This can be a good option if you have extra cash on hand. That way you Make sure you apply the extra payments to the principal only, not interest!
Request a New Appraisal
If you’ve owned a home through 2020-2023, you likely have experienced a significant value increase on your home. You may be able to request a new appraisal to see if your loan to value is below 80%. 80% LTV is typically the threshold based on the current market value. You may have to pay the appraisal fee, but it could be worth saving thousands on your payments.
Final Thoughts on How To Remove PMI
To remove PMI, you should consider factors such as your equity in the home, payment history, appraisal of the home, lender requirements, cost-benefit analysis, and your other financial goals.
If you meet the requirements and removing PMI makes sense for your overall financial situation, you can contact your lender to initiate the process. By removing PMI, you can reduce your monthly mortgage payment and save money over the life of your loan.
Overall, removing PMI can be a smart financial decision if you meet the necessary requirements and have carefully considered the costs and benefits.
Which method of PMI removal are you willing to try?
